OECD Issues 'Pension Markets in Focus 2020' Covering Retirement Savings in 90 Jurisdictions Worldwide
Assets in retirement savings plans reached new heights, exceeding USD 50 trillion before the COVID-19 outbreak Retirement savings in pension funds, pension insurance contracts and in other vehicles exceeded the USD 50 trillion mark worldwide for the first time, with USD 49.2 trillion in the OECD area and USD 1.7 trillion in other reporting jurisdictions at the end of 2019. The asset growth can be partly attributed to an increasing proportion of working-age people covered by a pension plan. This increase in coverage was especially strong in countries with relatively recent mandatory pension plans (e.g. Bulgaria, Israel, Latvia) or auto-enrolment programmes (e.g. New Zealand, the United Kingdom).
The increased proportion of individuals with a pension plan, coupled with an increase in contribution rates in some countries (e.g. the United Kingdom), probably accounts for the increase in total contributions and eventually in assets. Benefit payments also affect the trend in pension assets as they lower the overall amount of assets. The size of benefit payments remained limited in countries with relatively recent funded pension systems (e.g. Estonia, North Macedonia). Retirement savings plans recorded strong investment returns in 2019 and a positive investment income over the last 15 years The large growth of assets in 2019 also resulted from a strong investment performance, benefitting from an upturn of equity markets in 2019.
Retirement savings plans recorded investment gains in almost all the reporting jurisdictions in 2019. Fifteen countries, including the Netherlands, Switzerland and the United States, exhibited a double-digit real investment rate of return in 2019, with the largest gains observed in Ireland (18.5%) and the Netherlands (13.7%).
Viewed over a longer period, pension assets generated a positive investment income in most reporting countries. Three Latin American countries recorded the strongest annual real investment rates of return on average over the last 15 years: Colombia (6.2%), the Dominican Republic (6.8%) and Uruguay (5.2%). Pension funds in Canada and the Netherlands also managed to earn a real annual return that was relatively high compared to other countries, close to 5% on average over the last 15 years. Assets were sufficient to cover pension liabilities in most countries at end-2019 Assets in DB plans were equal to or even exceeded the level of pension liabilities in most countries at the end of 2019. Funding levels of DB plans, measured in this report as the ratio of investments to technical provisions (net of reinsurance), were above 100% in 6 out of the 13 reporting jurisdictions, and close to 100% in three others (i.e. Hong Kong (China), Luxembourg and the United Kingdom). However, the funding ratio of four reporting jurisdictions (i.e. Iceland, Indonesia, Mexico and the United States) ranged from 32% (in Iceland) to 97% (in Indonesia), meaning that assets in DB plans would not have been sufficient in the four countries to cover all the pension liabilities (the way they are calculated) at the end of 2019 (2018 for Mexico).
Retirement savings plans are forecast to recoup Q1 2020 investment losses by the end Q3 2020 The COVID-19 outbreak has created instability in financial markets, generating investment losses for retirement savings plans in the first quarter of 2020. OECD forecasts suggest that pension assets declined by 10% in the first quarter of 2020 in the OECD area, from USD 49.2 trillion at end-December 2019 to USD 44.3 trillion at end-March 2020. However, the recovery of financial markets in the second and third quarters may have enabled pension providers to recoup these investment losses and see the level of pension assets rise back to their pre-COVID-19 level between Q2 and Q3 2020.
The sharp fall of assets in DB plans, coupled with a decline in interest rates, has put a strain on DB plan sponsors and providers in the first quarter of 2020. The funding ratio of DB plans deteriorated in the first quarter of 2020 in Canada, Finland, the Netherlands, Switzerland, the United Kingdom and the United States. Policy makers swiftly prepared responses to support DB plan sponsors and providers. As financial markets rebounded in the second and third quarters of 2020, the funding position of DB plans improved but remained below their 2019 level in several countries, including the Netherlands, the United Kingdom and the United States.
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